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Minimum requirements for milk supply agreements
The dairy code sets out certain requirements for milk supply agreements. All milk supply agreements published on a processor’s website, or entered into by a processor, must comply with the code.
The code’s requirements represent minimum standards of conduct. A milk supply agreement may include additional terms, provided they are lawful and consistent with the code.
Publishing or entering into a milk supply agreement that does not comply with the code is a breach of the code and may lead to enforcement action and civil penalties.
Our processor checklist outlines the requirements for milk supply agreements.
The ACCC strongly recommends processors seek independent legal advice to ensure their milk supply agreements comply with the code.
Requirements for milk supply agreements
Cooling-off period
All milk supply agreements must include a 14-day cooling-off period. During this period a farmer can terminate the agreement without incurring any liability to the processor.
When the cooling-off period starts depends on whether the agreement is written or unwritten.
For written agreements:
- The cooling-off period begins on the day the agreement was entered into. Generally, this will be the day on which all parties signed the agreement.
For unwritten agreements:
- The cooling-off period begins on the day the processor provides a written record of the agreement to the farmer.
Supply periods
Milk supply agreements must:
- specify when the farmer will begin supplying milk to the processor
- specify the date the agreement will end, by reference to a particular calendar date
- end on the specified date.
Processors should ensure that none of their contractual requirements around renewal or termination of their agreements have the effect of creating a rolling agreement.
Example of an agreement end date
A one-year agreement may specify a commencement date of 1 July 2023, ending on 30 June 2024.
Supply periods under cooperative arrangements
If the processor is a cooperative and the farmer is a member of that cooperative, the milk supply agreement does not need to specify an end date.
In this situation, the agreement may provide that the farmer will continue supplying milk to the cooperative until either:
- the agreement is terminated, or
- the farmer ceases to be a member of the cooperative.
The code does not define ‘cooperative’. Generally, a cooperative is a legally incorporated member-owned business designed to serve the interests of its members.
The ACCC considers that a processor will be a cooperative for the purposes of the dairy code if it is registered under the Co-operatives National Law or corresponding State and Territory legislation.
Extensions of multi-year milk supply agreements
A milk supply agreement that has a supply period longer than 3 years, must give the farmer the option to extend the agreement for a further 12 months.
Farmers must give processors written notice of their intention to extend the agreement:
- at least 7 days before the end of the supply period, but
- no more than 30 days before the end of the supply period.
A farmer is only entitled to one extension of the milk supply agreement.
Quality and quantity requirements for milk
Under the code, processors are free to set their own quality and quantity requirements for milk. These requirements will reflect processors’ individual business needs.
Processors must clearly specify these quality and quantity requirements in their milk supply agreements. The milk supply agreement must also clearly specify:
- any sampling procedures and volume accuracy assurance measures the processor will use to test the milk
- what actions the processor may take if milk does not meet those requirements - in particular when the processor is allowed to reject milk
- that the processor will give the farmer written notice of the results of any testing as soon as practicable after the processor tests the milk
- that the processor will give the farmer written notice of any rejection of the milk as soon as practicable after the milk has been rejected.
A notice rejecting a farmer’s milk must include:
- the reasons why the milk was rejected
- any obligations on, or consequences for, the farmer - for example, in relation to the disposal of the milk
- any fees or penalties payable by the farmer.
Milk statements
Under the code, processors must provide regular milk statements to farmers.
Milk statements aim to provide information about the milk’s characteristics at each collection. Each statement should reflect the quality and quantity requirements of the milk set out in the milk supply agreement.
The milk supply agreements must specify:
- how often processors will provide milk statements
- what information will be included in those statements.
Fees for services
The milk supply agreement must specify what - if any - services the processor will provide to the farmer under the agreement.
Example of services a processor may provide
Under an agreement a processor may:
- require suppliers to submit to regular audits to be arranged by the processor
- impose a fee for multiple milk tanker visits per day.
The milk supply agreement must clearly specify the amount of any fees payable for those services during the first 12 months of the agreement.
If the supply period is longer than 12 months, the milk supply agreement must:
- clearly specify the amount of any fees during the first 12 months of the agreement
- require the processor to provide written notice of any changes to those fees every 12 months
- specify when written notice of any changes to those fees will be given to the farmer.
Transfer of ownership
The milk supply agreement must specify when ownership of the milk transfers to the processor.
Example transfer of ownership
The milk supply agreement may provide that the processor takes ownership of the milk when it is loaded into the tanker.
Limitations on exclusive supply agreements
Exclusive milk supply agreements are permitted under the code. However, an exclusive agreement must not contain any:
Maximum volume clauses
A maximum volume clause is a term that caps the total volume of milk that a farmer can supply during the supply period.
Example of a maximum volume clause
A term that prohibits a farmer from supplying more than 2 million litres of milk per year.
Tier pricing clauses
A tier pricing clause is a term that reduces the price a farmer receives for any milk supplied above a specified target volume.
Example of a tier pricing clause
A term that specifies a minimum price of $8.50/kgMS for the first 2 million litres of milk supplied, and a lower minimum price of $7.50/kgMS for any milk supplied after the first 2 million litres.
Varying and terminating a milk supply agreement
All milk supply agreements must specify the circumstances in which the farmer and the processor can:
- agree to vary or terminate an agreement, and
- unilaterally vary or terminate an agreement.
Any consensual variation or termination of the agreement must follow the process set out in the milk supply agreement.
However, farmers and processors must not vary an agreement if the varied agreement would not comply with the code.
Where an agreement is terminated, the terms of the agreement will continue to apply up until the specified date of termination.
Unilateral variations of a milk supply agreement
The code limits the circumstances in which a processor can act unilaterally to vary or terminate a milk supply agreement. In particular, a processor must not unilaterally:
- vary a term of the agreement unless the change is required to respond to a change in Commonwealth, State or Territory law
- vary the minimum price specified in the agreement unless a prospective step down is required to respond to exceptional circumstances
- terminate the agreement unless the farmer has committed a material breach of the agreement.
Processors’ right to unilaterally vary an agreement in response to a change in the law
A milk supply agreement must allow a processor to unilaterally vary the agreement if there is a change in a Commonwealth, State or Territory law which requires a change to the milk supply agreement.
The code allows the processor to vary the agreement to the extent necessary to comply with the change in the law. However, the processor must not reduce the minimum price under the agreement.
Processors’ right to unilaterally terminate an agreement for a material breach
A processor can only unilaterally terminate a milk supply agreement where the farmer has committed a material breach of that agreement.
A material breach refers to a breach that is objectively important or significant to both parties. It does not include a breach that is properly characterised as trivial or minor.
Whether a particular breach of the agreement constitutes a material breach may depend on the circumstances surrounding the breach and the nature of the obligation in question.
Examples of a material breach
The ACCC considers a material breach may include:
- refusing to remedy a breach that has been brought to the other party’s attention
- repeated or systemic breaches of the milk supply agreement
- a serious breach of relevant legislation or regulations - including food safety, environmental or animal welfare requirements.
The ACCC considers the following actions would not generally constitute a material breach:
- isolated or one-off breaches of the agreement that do not have a significant or serious impact on the processor
- temporary issues with the quality or quantity of milk supplied.
Process for varying or terminating an agreement
The milk supply agreement must specify the process that parties must follow to vary or terminate the agreement.
All unilateral variations and terminations must:
- be in writing
- be provided to the other party as soon as practicable after the action has been taken
- list the reasons for the variation or termination
- for variations, include the date the changes take effect.
If the parties agree to vary or terminate the agreement and that agreement is not in writing, the processor must create a written record and provide a copy of it to the farmer within 30 days after the change or termination occurs.
Processor checklist
Use our processor checklist to help you understand your rights and obligations under the code.
